Sri Lanka's foreign exchange reserves are virtually exhausted, which means that there is a shortage of funds to purchase goods from other countries.
And in May, for the first time in history, it failed to repay its external debt. The
government has blamed the Covid pandemic, which has hit tourism trade, one of Sri Lanka's largest foreign currency earners. Tourists also said they were stopped by a series of deadly church bombings in 2019.
However, many experts say it is due to financial mismanagement.
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At the end of the 2009 civil war, Sri Lanka chose to focus on supplying goods to the domestic market rather than trying to penetrate the foreign market.
Thus, income from exports to other countries remained low, but import claims continued to rise.
Sri Lanka currently imports $ 3 billion (£ 2.3 billion) more each year than it exports, resulting in a shortage of foreign exchange.
As of the end of 2019, Sri Lanka's foreign exchange reserves were $ 7.6 billion (£ 5.8 billion).
By March 2020, this had dropped to US $ 1.93 billion (£ 1.5 billion), and the government recently announced that it had only US $ 50 million (£ 40.5 million) left. The
government has also accumulated huge debt with countries like China to fund what critics call unnecessary infrastructure projects.
Much of the anger at the economic crisis was directed at President Gotabaya Rajapaksa and his brother Mahinda. He was appointed prime minister, but was dismissed in May.
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President Rajapaksa has been criticized for the significant tax cuts introduced in 2019. Treasury Minister Ali Sabri said he lost more than $ 1.4 billion (£ 1.13 billion) annually in government revenues.
When Sri Lanka's foreign exchange shortage became a serious concern in early 2021, the government sought to contain it by banning the import of chemical fertilizers.
Instead, urged farmers to use locally sourced organic fertilizers.
This prompted boundless harvest disappointment. Sri Lanka has to replenish its food supply from abroad, exacerbating the shortage of foreign exchange.
The IMF reported in March this year that the fertilizer ban (which was lifted in November 2021) has also hit tea and rubber exports.
Does the government have a plan to
resolve the crisis?
According to media reports, President Rajapaksa has agreed to resign. Prime Minister Ranil Wickremesinghe has also announced that he will resign to give way to the national unity government, but has not said at some point.
There is a question mark about who can run the country and what can be done to restore order.
Sri Lanka's Speaker of Parliament told the BBC that a new interparty coalition must be formed within a week of the president's official resignation.
The government is in talks with the International Monetary Fund (IMF) for a $ 3 billion (£ 2.5 billion) bailout.
The IMF, which works with 190 member states to stabilize the world economy, said the government must raise interest rates and taxes as a condition of any loan.
Prime Minister Wickremesinghe said the government is now very tight on cash and will print money to pay employees' salaries, but cautioned that this would prompt extra expense increases..
He also said that state-owned SriLankan Airlines could be privatized and that the country is calling on Russia and Qatar to supply low-priced oil to lower fuel costs.
How
much external debt does Sri Lanka have to repay?
The Sri Lankan government has accumulated $ 51 billion (£ 39 billion) in external debt. Of that, $ 6.5 billion owes to China. The two countries are discussing debt restructuring.
This year, the company will have to pay $ 7 billion (£ 5.4 billion) to cover its total debt, and will have to pay a similar amount for the next few years.
The World Bank has consented to loan $ 600 million to Sri Lanka.
India promises US $ 1.9 billion and can borrow an additional US $ 1.5 billion for imports.
G7 groups in major developed countries such as Canada, France, Germany, Italy, Japan, the United Kingdom and the United States have stated that they will help Sri Lanka achieve debt relief.
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